In a recent Forbes blog post, multimillionaire hedge fund manager John Paulson declared that today’s record-low interest rates made this the best time to buy homes in fifty years. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.” Why should we care what Paulson thinks? Well, he was among the few to accurately predict the subprime collapse and, while no one has a crystal ball, a closer look at the numbers supports his call to action.
Historically low interest rates are the key…and they aren’t likely to hang around for long.
As we wrote in SHIFT, buyers who “choose to wait until prices come down more” are gambling that interest rates will hold steady or drop. The truth is even a 10 percent drop in home prices is nullified by a 1 percent increase in interest rates. The figure below illustrates how this works for a $250,000 home purchase and the relative likelihood of each scenario.
To figure out which was a smarter bet–counting on home prices to fall further or interest rates to rise–our research department took the last ten years of monthly home price and mortgage interest rate data and ran the numbers to see which was more likely: an increase in mortgage rates or a further drop in home prices. Here’s what we found:
- A one percent increase in mortgage rates is ten times more likely to happen than a ten percent drop in home prices.
- A one percent rate increase more than offsets a ten percent reduction in home prices.
- When interest rates fall by one percent, the total interest paid is almost three times more than the interest savings from a ten percent drop in home prices.
- The probability of both happening at the same time is ridiculously small, and homeowners would still pay 15 percent more in interest over the life of the loan.
Interest rates have dominated the news in recent months as we’ve shattered record low after record low. Potential home buyers need to understand the positive financial impact low interest rates have on the cost of home ownership and the thousands of dollars that can be saved over the life of a typical mortgage loan. For those who can afford to buy, trade up, or invest, our current market presents a lifetime opportunity.
Realtors, how would you convey this critical information to your buyers? Share your script or, even better, share a YouTube video of you delivering it!
This is a must to share with your buyer clients. They may tell you they are going to wait until after the holidays or give some other reason, but if you show them these facts, you will get buyers off the fence!
Great post Jay! Last week I did a similar video post that focused on what amount a buyer could purchase with the same monthly payment if the rates went up just a point or two. I put a little “pain” in. It by showing that the same payment would eliminate a bed/bath if the rates went up just slightly.
The video can be seen here: http://www.youtube.com/techtipstuesday
Thanks again!
Michael Walker
Keller Williams Realty – Greater Rochester
Great video, Michael. I like how you flipped it and focused on purchasing power instead of cost or savings. I also like that you included a down payment, which is bit more pragmatic than my example. Good work. Thanks for sharing.
Jay Papasan
http://www.Twitter.com/JayPapasan
http://www.Facebook.com/JayPapasan
I could not have said it better. That said, I will be sharing this with all the “Buyers & Shoppers” that have toured my Open Houses lately. And tomorrow too. THANKS.
Fantastic – sharing on our facebook wall!
Keller Williams MT Realty – Bozeman
http://www.kwmontana.com
If you have a client sitting on the fence, this is a must read article. Always remember the house price may go down a little but you live with the interest rate for 15-30 years!
Rising interest rates is definitely going to minimize the chances of buying a home. As this article say’s, its a lifetime opportunity to make an investment in real estate.
Jay, great article. I shared similar information with a seller the other night. With just a one-half percent increase in interest rates, buyers will need a 6% increase in income to afford a home at the same price they qualify for with today’s rates. Conversely, a seller would need to reduce their price to maintain the same number of buyers in the buyer pool that could buy their home. Rates DO affect affordability and marketability…depending on which side of the transaction you are on.
The flaw in this logic is that housing prices decline as interest rates raise. This is natural and necessary since interest rates impact the entire market.
The buyers pain of rising interest rates only comes in the resistance of sellers to lower their prices.
Great post Jay! I would like to re-post this on my Las Cruces Real Estate Blog. So glad I joined Keller Williams Realty! We will be sharing this information with out clients buying and selling homes in Las Cruces!